Fortax Variance Analysis

Variance analysis

Decompose variances, set materiality, write the reason for each material movement, and bridge from one figure to the other. This skill helps prepare the analysis; the CA reviews it before it goes into a report, an audit file or a client meeting.

Numbers come from a workbook with formulas (fortax-xlsx-manipulation): the current and comparison figures are pulled from the trial balances or MIS, and every variance, effect and percentage is a formula. The narrative quotes those cells; it never recomputes them.

Inputs

• The two sets being compared: current vs previous period (TB or P&L), actual vs budget, actual vs forecast. Same ledger mapping on both sides — map with fortax-financial-statements Step 1 first.
• Drivers where available: quantities and rates (sales register by item, purchase register), headcount and salary register, price lists, the list of one-time items.
• The ledgers themselves, to find reasons. A reason is found in the entries, not invented.

Decomposition techniques

Price / volume

The basic decomposition, for revenue, cost of goods and anything expressible as price x volume.

Total variance = Actual - Budget (or Prior)

Volume effect  = (Actual volume - Budget volume) x Budget price
Price effect   = (Actual price - Budget price) x Actual volume
Mix effect     = residual (interaction term), or allocated proportionally

Check:  Volume effect + Price effect = Total variance
        (when mix is embedded in the price / volume terms)

Three-way (separating mix):

Volume effect = (Actual volume - Budget volume) x Budget price x Budget mix
Price effect  = (Actual price - Budget price) x Budget volume x Actual mix
Mix effect    = Budget price x Budget volume x (Actual mix - Budget mix)

Example — revenue:

• Budget: 10,000 units at Rs 500 = Rs 50,00,000
• Actual: 11,000 units at Rs 480 = Rs 52,80,000
• Total variance: +Rs 2,80,000 favourable
  • Volume effect: +1,000 units x Rs 500 = +Rs 5,00,000 (favourable — sold more units)
  • Price effect: -Rs 20 x 11,000 units = -Rs 2,20,000 (adverse — lower average selling price)
  • Net: +Rs 2,80,000

Rate / mix

For blended rates across segments with different economics.

Rate effect = Sum of (Actual volume_i x (Actual rate_i - Budget rate_i))
Mix effect  = Sum of (Budget rate_i x (Actual volume_i - Expected volume_i at budget mix))

Example — gross margin: product A 60% margin, product B 40%. Budget mix 50:50 -> blended 50%. Actual mix 40:60 -> blended 48%. Mix explains 2 percentage points of margin compression.

Headcount / salary

Total salary variance = Actual salary cost - Budget salary cost

1. Headcount variance = (Actual HC - Budget HC) x Budget average cost
2. Rate variance      = (Actual average cost - Budget average cost) x Budget HC
3. Mix variance       = level / department mix shift
4. Timing variance    = hiring earlier or later than planned (part-period effect)
5. Attrition impact   = savings from unplanned exits (partly offset by replacement cost)

In India also separate: annual increments, statutory changes (minimum wage revision, PF wage ceiling, bonus, gratuity valuation), and contract labour moved to or from payroll.

Expense categories

For operating expenses where price / volume does not fit.

Total expense variance = Actual - Budget

1. Headcount-driven   (salaries, PF/ESI, staff welfare, recruitment)
2. Volume-driven      (freight, packing, commission, payment gateway charges, power)
3. Discretionary      (travel, advertisement, events, professional fees)
4. Contractual/fixed  (rent, insurance, software subscriptions, AMC)
5. One-time           (settlements, write-offs, project costs, penalties)
6. Timing / phasing   (spend shifted between periods vs plan; provisions missed or reversed)

Also check in Indian books: GST credit reversed or disallowed and charged to expense, interest and late fee on statutory dues, prior-period items, and year-end provisions booked in one year and not the other.

Materiality and investigation triggers

Setting thresholds

1. Financial statement materiality: typically 1-5% of a benchmark (revenue, total assets, profit before tax) — for audit, use the materiality set under SA 320 in fortax-audit.
2. Line size: larger lines get lower % thresholds.
3. Volatility: volatile lines may need higher thresholds to avoid noise.
4. Decision relevance: what size of variance would change a decision?

Framework

Set amount thresholds for the client's size; common practice 0.5-1% of revenue for P&L lines.

Priority when many variances cross thresholds

1. Largest absolute rupee variance — biggest profit impact.
2. Largest % variance — may be an error or a process problem.
3. Unexpected direction — opposite to trend or expectation.
4. New variance — a line that was on track and is now off.
5. Growing variance — larger each period.

Narrative for each material variance

[Line item]: [Favourable / Adverse] variance of Rs [amount] ([x]%) vs [comparison] for [period]

Driver: [primary driver]
[2-3 sentences with the business reason, quantifying each contributing factor, citing the ledgers,
invoices or register rows that show it]

Outlook: [One-time / Expected to continue / Improving / Deteriorating]
Action: [None / Monitor / Investigate further / Update forecast / Ask the client]

Quality checklist — every narrative is:

• Specific: names the actual driver, not "higher than expected"
• Quantified: rupee and % impact of each driver
• Causal: why it happened, not just what
• Forward-looking: whether it will continue
• Actionable: follow-up or decision needed
• Concise: 2-4 sentences
• Evidenced: the reason is in the ledgers or documents; if not, it is a question for the client

Anti-patterns to avoid:

• "Revenue was higher than budget due to higher revenue" (circular).
• "Expenses were elevated this period" (which? why?).
• "Timing" without saying what was early or late and when it reverses.
• "One-time" without saying what the item was.
• "Various small items" for a material variance (decompose further).
• Explaining only the largest driver and ignoring offsetting items.

Waterfall (bridge)

Shows how one value gets to another through positive and negative contributors.

Starting value: [budget / prior period]
Drivers:        [contributing factors with signed amounts]
Ending value:   [actual / current period]
Check:          Starting value + sum of drivers = Ending value   (a formula cell)

Text waterfall when no chart tool is available:

WATERFALL: Revenue — Q2 FY 2026-27 actual vs budget          (Rs lakh)

Q2 budget revenue                                     1,000.0
  |
  |--[+] Volume growth (new customers)                  +80.0
  |--[+] Higher sales to existing customers             +40.0
  |--[-] Price reductions / discounts                   -20.0
  |--[-] Customers lost / lower orders                  -35.0
  |--[+] Exchange gain on export sales                   +5.0
  |--[-] Timing (orders shifted to Q3)                  -15.0
  |
Q2 actual revenue                                     1,055.0

Net variance: +55.0 (+5.5% favourable)

Bridge reconciliation table:

Individual drivers can exceed 100% when there are offsetting items.

Good practice:

1. Order drivers from largest positive to largest negative, or in business sequence.
2. Keep to 5-8 drivers; group the small ones into "Other".
3. The bridge must reconcile (start + drivers = end) — a check cell.
4. In a chart, favourable and adverse bars in two distinct colours, with a legend.
5. Label each bar with amount and a short description.
6. Include a total variance bar.

In Excel, build the bridge as a stacked column chart with an invisible base series, or a native waterfall chart where the Excel version supports it (openpyxl cannot write native waterfall charts; use the stacked-column method).

Budget vs actual vs forecast

Three-way table:

When to use each:

• Actual vs budget: annual performance, incentives, board reporting. Budget is set at the start of the year and not changed.
• Actual vs forecast: operational management, emerging issues. Forecast is updated monthly or quarterly.
• Forecast vs budget: how expectations moved since planning; planning accuracy.
• Actual vs prior period: trend, sequential performance; useful where the budget is not meaningful (new business, post-acquisition).
• Actual vs same period last year: growth adjusted for seasonality (festive quarters, March-end loading).

Forecast accuracy

Forecast accuracy = 1 - |Actual - Forecast| / |Actual|
MAPE = average of |Actual - Forecast| / |Actual| across periods

Variance trends (systematic bias)

• Consistently favourable: budget may be too conservative.
• Consistently adverse: budget too aggressive, or execution problems.
• Growing adverse: deteriorating performance or unrealistic targets.
• Shrinking: forecast accuracy improving through the year (normal).
• Volatile: unpredictable business or weak forecasting method.

Output

Into the client folder next to the inputs (e.g. <Client>/<FY>/Audit/Variance_Q2_FY2026-27.xlsx): sheet Data (both sides, mapped), Variance (formulas, threshold flags), Bridge (with chart), Narratives; and a short summary: verdict first (what moved most and why), then the material variances, then the questions for the client where the ledgers do not show the reason.

Credit

Adapted from anthropics/knowledge-work-plugins (Apache-2.0). Changed by Fortax: rupee examples, Indian cost heads and statutory drivers, audit and Schedule III thresholds, workbook-first method.